120. It has pretty thin resources set against
what is available to the IMF, has it not?
(Mr Wilks) That could be an issue, yes. It will not
be able to conduct a lot of primary field research on the ground-level
impacts of what the IMF has been recommending. It will fall back
on desk reviews and going to one or two capital cities. That is
an issue. It has a quite ambitious work programme, as you say,
to set against the resources at its disposal. I think we will
really have to see.

121. Do you have a basic feeling? Is it going
to have a real impact?
(Mr Wilks) I think it is very helpful to have that
there, and the World Bank's Operations Evaluation Department,
which is somewhat analogous, has been helpful in doing some quite
hard-hitting reports on where the Bank has fallen short. It is
fairly independent mostly and it is certainly very welcome, and
I think to be promoted rather than having cold water poured on
it at the moment.

122. You sound quite hopeful. Is that view shared?
(Professor Vines) Yes. I think the three things that
they have in their first work programme are three very good things
on which there has been internal review of the Fund, certainly
on the financial crisis question, and to have review by this office
rather than internally within the Fund on these questions seems
an important step forward, but, as I say, we will have to look
at what the outcomes are like.

Chairman

123. Could I turn to the surveillance and standards
and codes. Article IV of the IMF states that "The Fund shall
oversee the international monetary system in order to ensure its
effective operation" and "The Fund shall exercise firm
surveillance over the exchange rate policies of members, and shall
adopt specific principles for the guidance of all members with
respect to those policies." In a report on the external evaluation
of IMF surveillance by the Chairman of the Executive Board of
the IMF in September 1999 it was stated that a number of directors
felt that "Fund surveillance had moved inappropriately beyond
the original core issues, including into areas such as labour
markets, pensions reform, social policy and governance."
Given that the original remit was surveillance over the exchange
rate policies of members, how much legitimacy does the IMF have
in undertaking wider surveillance on issues such as pension reform
or social policy?
(Professor Miller) This comes back to an issue that
came up earlier, namely the interventionism of some of the IMF's
policy recommendations. One suggestion I wanted to make then,
and I can make it now, is that maybe there should be more lawyers
as well as economists on the teams they send. They do have an
excellent legal department, but I gather that the legal department
are not really a large part of the missions they send, and therefore
issues of whether or not things are constitutional just go by
the board. That is one practical point. Secondly, I would say
that I think there probably is a big distinction between what
happens to emerging market countries in trouble in intervention
there and what happens with OECD countries, for which the surveillance
is pretty much just pro forma; it is almost a waste of time; there
is very little intervention there. But I agree with some of the
concerns. One has to ask, is this really the business of the IMF,
for example, in Korea, you may remember that they required presidential
candidates to sign a declaration to accept various conditionalities.
There is a margin there which one can cross, and my feeling would
be that getting better lawyers on the scene at the time might
help.

124. The Japanese Government earlier on this
year accused the IMF of meddling in their domestic affairs. The
Japanese Finance Minister called the IMF remarks "unexpected"
and said it was unreasonable to urge more spending when Japan
already had very high public debt levels. Does the IMF run the
risk of creating a political backlash in a country due to its
scrutiny of domestic economies and financial systems?
(Mr Wallis) The Japan case is difficult for me to
quote on, but if you go back to the East Asia crisis, there the
fundamental problem had been lack of investor confidence, rapid
devaluation, spiralling debts, and what was needed then was a
debt restructuring, expansionary economic policy and some strategies
for supporting the poor. The problem was in many cases, Thailand
and Indonesia, for example, that the IMF basically instructed
them to run budget surpluses. How would we in this country look
at that move when we are in recession, in low inflation, to then
be pushed towards a budget surplus? In macro-economic terms it
does not make sense, let alone in poverty terms. So that intervention
on public spending, which is what we see so often, on either public
spending or trade liberalisation, is not looking at poverty, but
in some cases is not even looking at the right medicine for the
situation in macro-economic stabilisation terms. We think fundamentally
it was not the IMF that caused the East Asia crisis, but they
provided the wrong medicine in our view at that time in terms
of pushing countries to put up public expenditure and you ended
up with 20 million more people in poverty partly as a result of
the IMF actions in Indonesia. You ended up with 1.3 million kids
dropping out of school because of those public sector cuts. It
is the wrong medicine in macro-economic terms, and it was absolutely
the wrong medicine in poverty terms. We are concerned that sometimes
the IMF is not looking systemically at what is needed in the global
situation; it is looking down a very narrow macro-economic stability
lens which is not even economically correct, and it certainly
is not looking at the poverty effects. The area I want to go on
to is still the conditionalities around liberalisation. I am not
arguing that trade liberalisation cannot be an engine for poverty
reduction; in some situations it can, and there are some situations
where it has led to considerable export growth for people in certain
sectors, and there has been bad protectionism of monopolies in
some countries. There is no question of those things, but, as
a general policy prescription, to push for trade liberalisation
to reduce poverty, there is not strong evidence. You can go right
back to how this country grew, which was within some levels of
trade protection, to how America grewyou had Ulysses Grant,
the American President in the 1870s saying, "We are standing
up to Britain," and calling for America to drop its protectionism
and saying, "We will drop it in a couple of hundred years
and then we will push free trade, but let us get our economy sorted
first." Now there is a lot of evidence from some places like
South Korea. I worked as an economist for the Bank on South Korea
in the late Seventies/early Eighties. That was not a situation
of trade liberalisation; that was a massive investment in education
and land reform, backed by initial protectionism while industries
grew; export promotion and subsidisation and then opening up markets.
This idea that you can just open markets and that that will help
poverty is absolute rubbish in the wider context. The wider context
at the minute is still massive subsidisation of rich country markets,
farmers particularly. We are talking about $1 billion a day, and
we are talking about the average subsidy to a US farmer being
around $22,000 per farmer, which is some 50 times the average
income of farmers in the poorest countries. How do you compete
in the open market with that degree of subsidisation, let alone
the fact that those industries and farms are far more sophisticated
and have all the technical input, etc? It does not make sense.
Then when you add the barriers to many developing countries' products
getting into developed countries stillthere have been some
moves in the EU for the poorest countries but it is limited and
not covering sugar and crucial areas like thatwhen you
add those together and you add the massive fall in commodity pricescoffee
prices down 70 per cent over the last five to seven yearsyou
have a crisis in the agricultural sector, which is not helped
at all by IMF and World Bank conditionality to open up economies.
Haiti, for example, was an economy where there was a massive push
for liberalisation. It is now far more open than the US or Canadian
economy. The rice sector has been devastated. Tariffs were reduced
and you have massive malnutrition among children in the rice growing
sector. There is a serious problem. Tariffs came down in one year
from 33 per cent to 3 per cent under IMF pressure, and you have
tens of thousands of people facing malnutrition because of that
economy being flooded by cheap rice imports. This idea of pushing
liberalisation in the interests of poverty reduction and in the
interests of growth is one that has to be handled very carefully,
and has to be done in a phased way and has to look case by case
at what the poverty impacts are. Too many of the PRSPs and too
many of the IMF conditions have trade conditions attached. We
looked at 12 interim PRSPs with trade liberalisation conditions
attached. Only four of them have any mention of the poverty effects
of that, and only two out of that 12 had any measures to counter
that. Similarly, in Cambodia, a major rice grower, poor areas
have not grown as fast as the economy as a whole. The PRSP on
Cambodia had no mention at all of the poverty impacts. There is
some of the right rhetoric going on about PRSPs but the practice
is not happening in any fundamental way, and certainly there is
a lot of what I call macro-economic claptrap being talked about
trade liberalisation without really understanding where it is
necessary and where it is not. I do think there is a serious issue
there.

125. Does anyone else share those views?
(Professor Vines) The reason that surveillance is
under scrutiny is because it was so badly done in the run-up to
the Asia crisis. What was wrong there was that there was too guarded
an investigation of a very narrow range of macro-economic questions
without regard to longer term stability and solvency of financial
institutions, their regulation and their reform, and in particular
the encouragement of capital flows in a world that was not adequately
equipped to deal with them. But in improving surveillance we have
to be very careful not to want it to go too far. In what you were
saying a moment ago, it is easy to see surveillance becoming a
generalised discussion of the overall structure of the overall
development policy of a country, which is important to have discussion
about and engagement with, but it is not clear that that is an
object of IMF surveillance. The surveillance needs to ensure macro-economic
stability and financial appropriateness for the macro economics
being conducted. I think a surveillance which focuses on these
two things is important. To go too wide in the surveillance is
to encourage the move of the Fund in its actual policies in trying
to push countries to do things which will not necessarily be agreed
with on trade liberalisation, on market reform, on the way social
security and social nets work. All of these things are crucial
issues, but I am not sure that they are core surveillance issues
or in the end things about which Fund conditionality should apply.

126. Let me ask a very simple question. Here
we have the IMF with surveillance in Article IV, asking countries
to do certain things in the macro-economic field. The reality
on the ground is that in areas where they import certain commodities
they are poorer as a result. The ordinary person would say that
is absurd. We cannot give legitimacy to the IMF and its proposals
for countries when those countries are becoming poorer. That is
the big issue politically. If we dress it up in complicated language
that is no good. We need to have a simple answer to something
like that. I am not saying the solution is simple.
(Mr Wallis) We have the worst of all worlds at the
minute. We have under the surveillanceI do not mind what
kind of areas it is coming underreal interference in macro-economic,
public policy and public spending decisions of developing countries
and policy decisions around liberalisation but not taking the
poverty effects into account. Either one goes down the route Professor
Vines was talking about of the IMF getting out of that but being
aware of the issues, or, if they are getting into it, they are
going to have to take the poverty and other long-term effects
into account much more effectively than they do at the minute.
One needs either one way or the other.

127. How do we counter the protests against
globalisation? Quite a lot of people say there is something worthwhile
happening, so why is it that the big institutions are not the
recipients of all this anger and frustration? We must find a way
forward there and I am looking for a simple way.
(Mr Wilks) I think, to re-frame your previous question,
some people see that the IMF is doing the job more of a rating
agency for private investors to understand whether their money
will be safe here there or elsewhere, and not really fulfilling
a public mandate, and this is at the core of it. Therefore, there
is a political backlash phenomenon in specific countries. You
can think of Ecuador last January, when a lot of people came out
on the streets, the whole country was shut down for a number of
days to do with some IMF-mandated price rises. In Washington obviously
there are other protests, but I am thinking more of the World
Development Movement, which has tabled about 100 instances last
year alone of protests because of IMF conditions. There are some
specific and simple things on the governance side, for example,
which will not solve it immediately. I would suggest you might
want to ask Mr Ko­hler how his successor will be appointed.
At the moment the President of the World Bank is appointed by
the US administration, the Managing Director of the IMF is somehow
appointed by the Europeans with a de facto veto by the US. Mr
Ko­hler was second choice. It is not meritocratic and it
is not open. The World Trade Organisationagain, not everyone's
favourite organisation by any meansat least are more sensitive
to this point and now a Thai head of that institution will take
over from the current New Zealand head in September. So that is
a slightly symbolic thing, but it is a specific thing that I would
suggest can be dealt with. There was big bun-fight in appointing
Mr Ko­hler. It was not the normal meritocratic and open procedure
that you might hope for for the Head of a very important public
institution.

128. We are looking at the effects on countries
now. I take that point. We will look at that issue. I want to
focus on the effects on countries. If you have any questions for
us to put to Mr Ko­hler, that would be very helpful.
(Professor Miller) Ravi Kanbur, who worked for a while
for the World Bank, planned to have a poverty audit on the programme.
I do not think this is done formally, but it was picking up on
the poverty impact on programmes. Is this a formal part of what
is done?
(Mr Wallis) It has not happened. Our sense is that
there has been a lot of talk about it, the IMF and World Bank
have made a commitment to do ex ante and ongoing poverty social
and environmental impact studies, but in practice it is not happening
in many cases.I think it is a crucial issue, but the resources
are lacking; there is not money for that activity. Whether it
is under the aegis of the Fund, depending where one goes on future
roles, or the Bank doing that work in the context of poverty reduction
strategy papers, it is crucial, as it is crucial to make the PRSP
process work better. The more marginalised poor people's voices
are still not being heard. The fact that many of the poverty impacts
of trade liberalisation measures are not being looked at means
that we need a more open process that says whose voices have been
heard, what comments they have made, whether they were accepted
or not and what happened. That degree of transparency about who
was involved, what they said, and what was then agreed would be
very helpful, but the impact assessment needs some serious funding,
because we are living with old economics still, I would submit,
because we are not taking into account what is needed to protect
industries. It is not a blanket thing. There are many monopolies
in developing countries held by limited numbers of people where
you do not want to protect them, but those places where there
is a high degree of food sufficiency in a particular country and
those are held by large numbers of small farmers are the areas
where one needs some form of protection and some form of plan
to phase liberalisation in. It is really looking at the poverty
effects of what is right for a particular country.

129. If I can give you an example of my own
experience, less than two years ago I visited Bolivia, and I was
told the poverty reduction strategy was working very well and
they were in the vanguard of eliminating the cocoa crop. To show
us what good work was being done, they took us to a growing region.
We went by military plane to an air base, which was probably just
as well because there were 40,000 peasants demonstrating outside,
because there was nothing on the ground for them to do. They had
destroyed the cocoa crop but there was nothing for the population.
It is that vacuum, that hiatus that is here. It is no good the
UN or others saying, "We have made fantastic progress in
terms of eliminating cocoa crops" when the population is
starving and in penury.
(Professor Vines) There is much anger in many places
at the Fund's role in sustaining and continuing poverty and in
the difficult effects of globalisation on countries. I think a
Fund which aims to do too much asks for this anger. If it puts
itself into the position of an institution which is dealing with
a solution to a wide range of development problems, then when
development delivers its slow progress and disappointing achievements,
the Fund will come front in criticism. A Fund which is careful
about what it sets out to be responsible for, helping to prevent
financial crises, helping to manage them when they happen and
helping countries to run good macro-economic policies in the interim
is an institution which is playing its part, but only a limited
part in this overall process of development and poverty reduction.
To ask a Fund to do too much and then become entangled in a Fund
which as a result is too unpopular, so unpopular as to make its
work difficult, is to push in the wrong direction.
(Mr Wallis) While I might share that as a medium-term
goal, my concern is that there is a short term. The Fund is involved
in PRGFs in working with the Bank on poverty issues. Until that
wider mandate might change, it is crucial that the poverty effects
are taken into account, the impact assessments happen and that
that is well-funded, that there is greater involvement in those
PRSPs, and particularly, that this issue of trade liberalisation
is really addressed in poverty terms, what is right and what is
not. It is crucial. My worry would be that what we do not want
to see is that these issues are not addressed over the next few
years while the Fund is involved in those issues.
(Professor Vines) If the Fund is taking these things
on and the measures are not evaluated, that is not a good outcome.

130. The trade issue is going to be the big
issue for campaigning groups in this country. It has already started.
The opportunity for more disaffection is going to occur.
(Mr Wilks) It might be helpful in your preparations
for Mr Ko­hler coming next week to focus for a couple of
minutes on the case of Malawi, where there is a food crisis, as
you are probably aware. There are a lot of people trying to work
out where to apportion the blame for this. I think the blame is
mixed; it is not solely an IMF problem. There are a number of
issues about the way in which different government departments
and state agencies have responded. The Malawi President said about
one month ago, "The IMF is to blame for the biting food crisis.
They insisted that the government sell maize from its strategic
grain reserve and requested that the government abandon its starter
pack agricultural subsidy programme." The IMF riposted, "We
have no expertise in food security policy and did not instruct
the Malawi government or the National Food Reserve Agency to dispose
of its reserves." There is a lengthy report by Action Aid,
Malawi, published this month looking into the issues. We do not
have the time to go into it now, but it is interesting that the
statement of the May 2002 mission of the IMF which flew to Malawi
made on the basis of that mission was condemned by Action Aid
for displaying "remarkable insensitivity and ideological
narrow-mindedness". They were pointing out that the IMF mission
statement failed to mention that hundreds if not thousands of
people had died from starvation in the previous months. It was
the point that you are making. They are not looking at the impact
on people on the ground. It was looking just from the fiscal side
of things. You are talking in general, generic, typical IMF terms.
"The parastatal sector will continue to pose risks to the
budget." "Government intervention in the food and other
agricultural markets . . ." "Taking heavy recourse to
budgetary financing, crowding out more productive spending."
It did appear like an academic deliberation on the finer points
of fiscal targets, etc, not an agency which is concerned about
impacts on the ground. This type of insensitivity and apparent
narrow-mindedness does feed the perceptions that the IMF has not
changed nearly as much as the announcements that you hear at the
annual meetings.

Kali Mountford

131. Does this not take us back to Professor
Miller's opening remarks, about the appropriate work for the appropriate
agency? Is the IMF the right agency to deliver some of this work?
Professor Vines just said some interesting things about the macro-economic
focus. I would like to know, if we were to take a sequential approach
to this, what would be the sequence that each of you would follow?
We have here agencies that have sometimes too tight a focus and
sometimes too loose, not appropriate for each set of circumstances.
How do we get from this apparent chaos, as it seems from your
descriptions today, to something which is actually practically
applied in each situation?
(Professor Miller) My inclination would be to ask
how do we do it inside the nation state? There are problems of
poverty, problems of balancing budget, and the Treasury is well
known always to be looking at numbers and taxes, but we have other
agencies that balance that out. That would be my instinct. I am
ashamed to say I have not done this, but how do you do it nationally
and then how do you replicate this at a global level? We need
to have some counter-balance to the pure budgetary instincts of
the IMF.
(Mr Wallis) I think the issue, whatever the roles
are, is that there does need to be not working in separate boxes.
Part of the reason there was a lot of pressure for the IMF to
get into more poverty issues was because its policies were working
in a very different way to the other side of 18th Street in Washington,
the World Bank. That was part of the reason; they were pulling
in different directions. What I think is crucial is that we do
not get to an unjoined-up approach to policy, where the Fund is
looking for massive public spending cuts at the same time as the
Bank is trying to reduce poverty or other people are trying to
reduce poverty. Given that, I think the starting point is the
discussion about each country's economic situation, which starts
not from just the macro-economic stabilitywhich is terribly
important, and I am not denying thatbut starts actually
from what are those millennium poverty goals, what are we actually
trying to do in terms of education and health in this country,
and what is necessary then in economic terms to give a stable
economic policy to get us there. It starts from the wrong place;
it still starts from "How do we get a balanced budget?"
and then how we make sure there are enough safety nets, not from
the point of what is actually economically needed for this country
to reach its development goals, which in itself will lead to much
greater economic activity and potential for greater economic stability.
The idea that growth and poverty are in opposition to each other
is not necessarily correct. They are not. There is clear evidence
that fostering the right kind of growth strategy, with more redistribution
of resources to bring poor people into it actually reduces poverty
and gives more sustainable growth. There is lots of evidence about
the right types of models out there. The problem is people are
thinking very short-term, the Fund particularly is pushing short-term
thinking on a very narrow definition of macro-economic stability,
not working with the Bank and other governments to think about
what is needed to meet the millennium goals. I think that is where
one should start, not from a narrow definition of responsibilities
only. It is going to be crucial; even more important than who
does what, is what you are aiming at and what the policies are.
That is the bit I think that is going wrong at the minute.
(Professor Vines) I do not know the Malawi story in
detail, but enough of it to know that, as you have suggested,
it points to this real conflict. To ask that the Fund essentially
disregard the other concerns and set about doing what you describe
is not right, and the Fund says in reply, "But to present
this set of problems to us and ask us to override our concerns
with macro-economic and financial stability to deal with them
is not the solution to the problem either." We seem to have
at the moment therefore the requirement that the Fund becomes
responsible for a very wide range of things in order to prevent
it making these decisions which compromise its core responsibility.
The alternative is to keep working with the Bank and others in
saying, "This is a crisis, it is going to need particular
action, we have our financial objectives and we have the crisis
to deal with and they have to be done together." As you describe
it, it is right way to go forward, and it involves both together,
rather than either the Fund overriding these other objectives
or being responsible for everything.
(Mr Wilks) I think it can be clearly phrased. We do
not want the IMF to be responsible for all these issues, but we
want them to be responsive to all these issues. A government should
evidently be concerned with feeding people first and sorting out
the budget numbers at the same time, but certainly not as a first
order priority. Mr Ko­hler has done something useful in this
streamlining and conditionality review that he conducted with
the IMF last year, and now supposedly the IMF is to concentrate
its conditionality on three areas: exchange system, financial
sector and fiscal policy. So conditions should not be imposed
on labour reform or many of these other issues. There is the question
of whether the conditionality is being imposed by the World Bank
or somebody else. There is no net reduction in conditionality.
This is why some kind of matrix of who is responsible for what
in these countries is being proposed in terms of donor coordination
and transparency. At the same time, I think we need to think about
reinforcing the UN specialised agencies. On labour, for example,
there has been the International Labour Organisation, which is
a tripartite place where some of these issues are dealt with.
Why not reinforce that at the same time as carving off some of
the responsibilities from the IMF?

Chairman

132. Professor Vines, in your paper you mentioned
the need for clarity in the roles, the issue of liquidity crises
in emerging economies which you mentioned earlier. We have the
situation of Brazil, where they have followed all the rules, but
it is still a huge issue and a huge problem. I mentioned Mr Soros.
He was with us the other day and he expressed deep concern about
the situation in Brazil. So here is a situation not with developing
countries but with emerging markets and we are still getting things
spectacularly wrong. What is the advice there?
(Professor Miller) The answer is to help Brazil. There
was a piece in yesterday's Financial Times from Ted Truman,
who used to work in the Federal Reserve, saying that the IMF should
really back Brazil. There seems to be a panic about some possible
future election that is holding the market. As you have said,
they have done a lot right. Debt is quite high. The debt/GDP ratio
is actually higher than one would have hoped for, which is part
of the problem, but the other problem is that the interest rates
suddenly spiralled and this gives a picture of unsustainability,
because if you push interest rates up to 18 per cent and debt
is over 50 per cent of GNP, you suddenly get an extra charge on
the budget and everyone begins to think the country is falling
apart. Hopefully that is panic, and when things get sorted out,
that need not be a permanent charge on the budget. They have obviously
devalued; the real has gone down enormously against the dollar,
which was of course not true in the case of Argentina. So in a
sense you feel this is a panic and this is where Brazil needs
support. It may, oddly enough, be a case where you do want to
get some reassurance that there is not going to be some government
that repudiates all Brazil's commitments. There is a political
factor in there as well, one has to concede, but I take the view
that it is a panic and it is a case where the IMF has to be seen
to be helping, and presumably other countries as well.
(Professor Vines) To have the Fund walk away, as some
commentators have suggested it might, and some from the US have
suggested, is exactly the wrong solution to problems of this kind.
That is where the Fund needs to be, not helping just in fundamental
solvency crises, but in liquidity panics of this kind, and it
does mean that there may need to be somewe are a way from
this yetlending from the Fund into a position where the
Brazilians have been unable to maintain all their current debt
repayments. I think asking a question about that is an important
thing, if the Fund has the commitment to do this.
(Mr Wallis) This is an area Oxfam has wanted to do
quite a lot more work in, but we come back to the comment Keynes
made at the original Bretton Woods Foundation. When the amount
of money going round the world reflects like a casino and is not
related to trade, there are going to be major problems. I think
we are now facing that to some extent, and there is a fundamental
issue of not managing financing for trade or foreign direct investment
but managing speculative capital flows, and I do not think there
are any easy solutions. That seems an issue of global management
that we need to grapple with in a rather more systemic way than
just what we have been talking about, much as I agree with it.
As Professor Miller said earlier, if you think of many of these
global problems in the context of how we deal with them in a national
economy, some of the answers longer term might become apparent,
because we have means of controlling money supply, inflation target
rates, etc, but at the global level we lack some of those mechanisms.
I think that is the fundamental problem. The solutions are not
easy though.

Kali Mountford

133. That is George Soros's main point, particularly
about rates. Brazil is paying 17Ö per cent above baseit
is down to 16 now. He is suggesting we could look at global rates,
and particularly in this case he suggested 3 per cent, because
at a single stroke, if they wanted to do one thing, that would
help. I do not know what you think the response to such a suggestion
might be.
(Mr Wallis) It is outside my area of competence, but
certainly we would need at some point to find some way of managing
these issues. We used to manage them locally within the economy,
we have moved to managing them at national economy level, and
we have to manage them at the global level, and it sees to me
that this whole question of speculative capital flows and interest
rates we have not got right. Similarly, we have a redistributive
tax system in this country. We talk still about foreign aid on
a global level. We have not even got some of those mechanisms
past first base. We have to do a lot more thinking. I am afraid
I have no easy answers on that. It is an area that we want to
explore as an organisation, because it is a major poverty issue.
(Professor Vines) There are no easy answers to this.
To have the Fund or some other international agency stepping into
markets like this where rates are at 17 per cent and lending at
3 per cent is unimaginably expensive. We do not have the international
commitment to make that possible. In the end, we have to countenance,
much as Mr Tyrie did not like the suggestion, the possibility
that there is a standstill in these circumstances, and people
do not pay when interest rates do this, or they suspend payment,
and that there are international institutions that manage the
suspension whilst it is clear what the adjustment policies are,
and then the markets re-open when the panic has been dealt with.
(Professor Miller) I should have said that in Ted
Truman's comments he did look for some guarantees down the line
that there would be some fiscal stability to deal with the feeling
that the market is worried that the debt may not be paid, which
is why some of these interest rates are so high. It is a two-part
strategy. You give some fiscal reassurance on the one hand, so
Brazil accepts those. You then give some short-term money and
you may have some re-profiling of the debt. If the fiscal stability
is guaranteed, there is no need to take a write-down, but it may
be that you cannot pay everything right now. I see it as a multiple
strategy. Debt reassurance in the longer run, money in the short
run, possibly some debt restructuring, and once these things can
be done, the problem disappears, and interest rates come down
to base rate plus 5 per cent rather than plus 16.

134. As long as it does not build in debt problems
for a longer term than had previously been anticipated.
(Professor Vines) That is why fiscal reassurance is
central. Read Argentina into that.
(Mr Wallis) Could I raise the other issue of debt?
This is back to the HIPC questions and the highly indebted countries.
The IMF conditionality has meant that countries like Guyana, Senegal
or Honduras have stalled because they have not met IMF conditionality,
and basically it has meant they have not got the HIPC relief that
they should do. There really does need to be a challenge to Mr
Ko­hler about the fundamental purpose of the HIPC process.

Chairman

135. You said in your paper that HIPC is in
crisis. Can you pursue that.
(Mr Wallis) Very quickly, to give you one example
that would position it, a country like Uganda, with a good record,
etc, their coffee exports, a major export crop for Uganda, were
worth $433 million in 1994-95. Because of the decline in coffee
prices, in 2000-01 when they exported the same amount of coffeetonnage
had not gone down, volume had not gone downthat was worth
$110 million. In other words, Uganda's exports had gone down from
$400 million in real terms to $100 million, so a quarter of what
it was in value. That is because of the decline in coffee prices.
That $300 million gap is three times what they got out of the
HIPC process. Even for those really good countries that have done
everything right, you have debt relief giving them $100 million,
you have them losing $300 million a year on falling commodity
prices, and that is repeated right across the board and is even
more of a crisis for those countries that are being stalled in
meeting their conditionality. There are too many steps on the
way. The export projections that the IMF is making in judging
what amount of debt relief people will get, because it is a debt
to export ratio, so the export projections are far too optimistic,
and have been proved wrong time and time again, have meant that
that debt relief that has come through has been too little. So
there is a problem round not having realistic export projections,
there is a problem of falling commodity prices where in effect
debt relief is coming in too little too late, and the amounts
are unrealistic anyway, and there is a crucial need for topping
up HIPC. That is being addressed, I hope, by the G8 at the minute,
but there is a need if it does not happen for that $1 billion
extra to be on the table to top up HIPC. But it is both more money
but also much more speed in a number of cases, and taking some
of those conditionalities out of the case, and much more realistic
projection of exports, so the amount of debt relief people need
is greater. I think there is a fundamental longer term problem
that while it is important to look at debt to export ratios in
terms of sustainability, one also needs to look at what money
countries need to meet their health and education targets, and
that will be a different way of looking at it than asking how
the debt as a percentage of the budget affects that. You still
have big examples where very poor countries are paying out far
more in debt than they are spending on their health and education
budgets, through no fault of their own. There are, of course,
cases where it is through fault of their own but there are many
cases where it is not through fault of their own.

Kali Mountford

136. I wanted to ask about the poverty reduction
strategy. Considering what you said earlier and what you have
just said, I think it links nicely into that and how you get greater
input from the developing nations into their own poverty reduction
strategies and what we ought to be taking more account of perhaps.
(Mr Wallis) There are three or four major issues.
One, that one does start from the position of what is needed to
meet those millennium goals. That should be the starting point,
and then that one has macro-economic stability to meet it, rather
than the current starting point, which is macro-economic stability
plus whether we need bigger safety nets to do these things. That
is the wrong way round. Two, what we have already said, really
taking seriously the ex ante impact assessments on poverty that
are not happening. Three, removing the trade liberalisation conditionality
that is being linked to PRSPs. Four, much greater participation
by particularly marginalised communities, particularly rural marginalised
communities; they are the ones whose voices quite often do not
get heard. There are some good cases where people have made attempts
to try and do that, but in some cases then it is not clear or
transparent how much account has been taken of those interests.
The PRSP, like everything else, has different interests inside
the country, and we know whose interests are heard; it tends to
be the bigger farmers or the urban communities, not the poor rural
communities, and there needs therefore to be transparency over
who has said what and what has been taken into account. It is
a political process.

137. It is not an easy one, is it? The last
two of those, the trade liberalisation and the internal pressures
in a country making their own representations, I would have thought
might have been perhaps potentially the most difficult of the
two. I am thinking right now, of course, of industrialised nations
and their current positions and self-interest. What prospects
do we have of dealing with the interests of the industrial nations
versus the developing nations? While they might mean well, they
sometimes contradict each otherin fact, they often contradict
each other.
(Mr Wallis) But even when you have something like
the Common Agricultural Policy, who is actually being protected?
We know a lot of the money is going to a relatively small number
of rich farmers, so there is an interim question of whose interests
in those industrialised countries are being served. I think there
might be more of a win-win than we realise.

Chairman

138. On the issue of grants and loans, that
was a hot topic a number of months ago. The Committee has visited
America, we have received representations from a number of NGOs,
and there is a feeling this may be not as divisive an issue now,
but the issue is, if we are going to go to the grants regime,
there has to be a medium/long-term future for it. Does that sum
it up?
(Mr Wilks) Yes, I think that broadly sums it up. Obviously
the IDA is moving to become self-financing because of its re-flow,
so it would not need to come back to the donors every three years
cap in hand. There is guaranteed finance available looking forward.
There is that dimension. There is also the political dimension.
Some people are concerned that the US and some of the other donor
countries did not want it to become self-financing. They want
every three years to have the opportunity to set new issues. One
other dimension is the question of the balance of financing mix
for different agencies. I come back to the UN agencies. Many of
them already have grants at their disposal, and so do bilaterals.
Do we want the World Bank to be doing everything? There is a question
of duplicating and possibly competing with other places. If grants
are to be given from London and Washington, can they not be channelled
through existing mechanisms rather than through the World Bank,
which was originally set up to provide loans? I think there are
a number of aspects to it.

Kali Mountford

139. I am quite interested in the point you
just made. I am concerned at some of the statements by President
Bush that we might end up with a situation where grants can be
given direct from Washington and perhaps sidelining the millennium
development goals and missing the point altogether, while at the
same time not having a regard for building up the Fund. Do you
share those concerns?
(Mr Wilks) We will have to look into the details of
the Millennium Challenge Account another time, I guess, but there
are issues about how the US would use it. In principle, we would
favour the money being channelled multilaterally, but if it is
grant, they can go through some of the UN institutions; they do
not necessarily have to go through the World Bank.